The Ins and Outs of Financial Modeling

Thursday, November 17, 2016, 6:00 AM | Leave Comment

If your company is struggling, or you just want to enhance its performance, you might want to look into financial modeling.

What is financial modeling, exactly? It is the practice of creating a mathematical model, or a representation of a real financial situation.

For instance, the model could simulate the future performance of a company, based on its previous performance and market, among other factors. The representation can then be used further, in creating business strategies and minimizing risk.

This abstract concept might still be difficult to comprehend, so let us try to explain it step by step.

    The Ins and Outs of Financial Modeling1

  • What Do You Need?

    Although it sounds complicated, financial modeling requires no fancy tools. In fact, it can be done using the humble Microsoft Excel, its free counterpart – OpenOffice Calc, or any similar program.

    There are other programs designed specifically for modeling, business forecasting and planning, but they are not necessary.

    Professional financial software usually contains specialized features such as audit trials, predictions, balance sheets, chasm management and others.

    However, a qualified analyst is able to determine the variables of an event, and create the relevant formulas with very basic software.

    Everything you need can be done using humble spreadsheets. Instead of focusing on expensive, highly specialized software, successful modeling is more a matter of expert knowledge.

  • What Does a Financial Analyst Do?

    The person who does the modeling is usually a financial analyst.

    A financial analyst is an expert whose job is to research all of the conditions in your company and around it, in order to make recommendations, such as a specific course of action.

    The analyst must be up to date with all current events and conditions in the relevant field.

    Taking into consideration a wide variety of factors, they create an abstract model which predicts future events for different variables.

    This is a complex and nuanced task. It is therefore essential it be done by a professional analyst with a rich experience and in depth expertise. Consulting a MSM loss management company is probably the best way forward.

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  • Who Benefits from Financial Modeling?

    How do you know whether your company needs a financial model?

    Here are some of the situations that warrant the help of a financial analyst specializing in modeling:

    • In case of a leveraged buyout, when a company plans to take out a significant loan in order to acquire another company. The assets of both the acquired and the acquiring company are usually used as collateral for the loan, which, in some cases, makes it a risky move. A model can help significantly with risk assessment.

    • When a company consists of numerous divisions, whose value needs to be determined. The sum of the parts model is particularly useful in these cases.

    • When the attractiveness and profitability of an investment is investigated, experts opt for the discounted cash flow method.

    • The valuation on mergers and acquisitions is done when a company is planning to acquire another company, in order to determine whether the acquisition will be financially beneficial. It includes an in-depth analysis of the worth of the company being acquired.

To be successful and able to stay afloat in today’s turbulent business world, a company needs all the help it can get. Hiring a financial analyst who can provide an in-depth analysis of all the microeconomic and macroeconomic conditions is hugely beneficial.

A good financial model is a valuable asset to any company that wishes to stride forward. No one can predict the future with complete certainty, but to succeed in business, we must do our best to try.

Author BIO

Dan Radak is a marketing professional with ten years of experience. He is a coauthor on several websites and regular contributor to BizzMark Blog. Currently, he is working with a number of companies in the field of digital marketing, closely collaborating with a couple of e-commerce companies.

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